Special report: Making the journey a success

Nicky Burridge
Gianfranco Bonadies

The path to a prosperous initial public offering (IPO) is no regular journey – it is pockmarked with challenges, and if executed incorrectly, could spell financial ruin for even the most promising company. But behind every successful listing is a hardworking team made up of seasoned professionals and accountants who take full control of the entire situation and ensure every detail is fully acknowledged and addressed pre- and post-IPO. Nicky Burridge speaks to CPAs working in IPO advisory about how they lend their expertise in the world of listings, and how going public in a capital market as deep as Hong Kong’s now demands a diverse and highly sought-after skill set

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Nicky Burridge
Gianfranco Bonadies


Hong Kong is home to one of the most buoyant initial public offering (IPO) markets in the world. A total of HK$398 billion was raised through listings on the Hong Kong Stock Exchange (HKEX) in 2020, despite the economic turbulence caused by the COVID-19 pandemic. Its combination of deep capital markets, an extensive global investor base and strong regulatory standards has seen Hong Kong ranked as the world’s top IPO destination for seven of the past 12 years.

The city also plays a key role as a gateway between Mainland China and the rest of the world through Stock Connect. The initiative, which gives investors in Hong Kong and Mainland China the opportunity to trade securities listed on each other’s exchanges, further increases the appeal of Hong Kong as an IPO destination. “Hong Kong plays a crucial role as the global connector between Mainland China and the rest of the world. With solid fundamentals, the Hong Kong market has shown its resilience in times of global uncertainty,” says Ivanka Huang CPA, Senior Manager, Capital Markets Group at KPMG China.

Jacky Lai CPA (practising), Partner, Assurance at EY, points out that Hong Kong’s high regulatory standards, which offer strong investor protection, have also attracted and retained a diversified investor base for both IPOs and secondary fundraising. “Hong Kong is a unique market with an array of Chinese companies and overseas listed companies,” he says.

HKEX regularly reviews its listing rules to ensure it remains competitive. In 2018, it made it easier for pre-revenue biotech companies and new economy companies to list. Since then, 128 new economy companies have listed, collectively raising HK$554 billion, including big names such as Alibaba and JD.com, and JD.com’s logistics arm JD Logistics, which went public on 28 May. “The new listing regime has added to the diversity of companies that can list, increasing the demand for Hong Kong’s capital markets, creating more opportunities for the city’s financial industry, as well as those who offer professional services to listing applicants,” says Huang. Hong Kong’s status as a leading IPO market is attracting more CPAs to specialize in this area. Lai says: “A strong IPO market creates lots of career opportunities for CPAs: from the finance team built up in the pre-IPO stage, to the post-IPO stage with increased corporate governance and compliance needs, as well as the increased demand for consultancy services and auditing services. The stressful but fruitful IPO experience equips CPAs with various skills they need for their further career development.”

A transformation opportunity

While raising funds is the primary reason companies embark on an IPO, the process also provides a range of secondary benefits. Lai explains: “The IPO process involves the complete transformation of the people, processes and culture of a company from a private enterprise to a public one. IPO candidates that are used to having a culture focused purely on financial success and growth will realize they need to formulate a more comprehensive long-term business strategy, giving a really clear roadmap for the company that can be communicated to the stakeholders.” Huang agrees, pointing out that through completing a holistic review of the company as part of the IPO process, the management will often gain a better understanding about its business and culture. She adds that another benefit is that listed companies can typically raise further finance more easily, while they tend to enjoy better terms for bank financing.

Archie Fong CPA, General Manager at Yue Xiu Capital Limited, and a member of the Institute’s Corporate Finance Advisory Panel, points out that companies often need to restructure ahead of a listing. This refines their business operations and forces them to pay more attention to corporate governance issues, which will ultimately benefit their business over the long term. “For a private company, going public represents an uplift in the company’s corporate image and corporate governance measures,” he says. Fong adds that once an IPO is completed, a company is also more likely to be able to introduce strategic investors or partners to help it further develop its business.

Kin Yung CPA, Associate Director at CCB International Capital Limited (CCBI), and a member of the Institute’s Corporate Finance Advisory Panel, adds that not only do companies enjoy an enhanced reputation through listing, but for those in certain sectors, it can also create opportunities to expand into new markets, as both investors and consumers are more familiar with their brand. He gives the example of Mainland restaurant chain Haidilao, which after raising more than HK$7.5 billion on the HKEX in 2018, went on to open a number of outlets in Hong Kong. Yung points out that an IPO can also help companies attract and retain high quality talent, as once they are listed, they can offer staff share options schemes.

“For a private company, going public represents an uplift in the company’s corporate image and corporate governance measures.”

The IPO journey

A typical IPO can be divided into three stages. The first is the preparation stage, which involves pre-IPO planning, conducting due diligence and preparing the prospectus and the related listing application documents. Next is the submission stage, during which the candidate submits the listing application pack to HKEX and the Securities and Futures Commission (SFC), and answers any queries they raise. The final part of the process is the post-hearing stage, during which the company must complete its prospectus, carry out roadshows and investor presentations, build a book of investors and price its shares.

Fong points out that accountants may be involved in the IPO process in a number of different capacities, including as a chief financial officer of the company listing, its sponsor, a reporting accountant working on the IPO, and an internal control consultant or tax advisor. Yung adds that accountants acting as the reporting accountant will not only prepare the accounts report for the company, but will also assist with its feasibility study, and assess whether it can meet the profit test. In addition, they will also prepare a reliable and verifiable profit and working capital forecast memorandum.

Pre-planning considerations

The pre-planning phase is key to assessing whether a company is ready for an IPO, and should generally be started 12 to 24 months before its target listing date. Fong says: “Every IPO candidate has a different history, structure, business model and financial background, so every part of the pre-IPO process is unique and equally challenging. But this makes helping an IPO candidate to list exciting and rewarding.” Lai of EY explains that, unlike exchanges in some markets such as the United States, HKEX has a sponsor regime for IPOs, meaning applicants need to use a licensed investment bank to assist them with their listing application.

As a result, the company will need to appoint a sponsor, as well as a reporting accountant and legal advisor. Companies generally create a project management office to oversee the IPO process and set the listing timetable, as well as to gather relevant documents and resources.

In order to list on the Main Board, companies must meet one of two tests: a profit test or a market capitalization/revenue/cashflow test. To demonstrate that they meet one of these tests, companies must submit their accounts for the past three years for assessment. Huang of KPMG says: “Companies should perform a holistic review to assess whether the business will meet the listing requirements and the readiness of its financial reporting systems, internal controls and corporate governance. They should also consider whether the group structuring is tax efficient as part of their reorganization planning.”

She points out that audit firms can play a key role in this part of the process by identifying any potential issues ahead of the listing through reviewing the company’s existing accounting policies and the quality of its accounting records. “They can also review and advise on the accounting implications of different group restructuring options and provide a review of the key internal control procedures in relation to the financial reporting process, making recommendations to help the company identify and close any gaps,” Huang says.

A daunting exercise

A key part of the pre-IPO process is having due diligence carried out on the company by the sponsor, reporting accountant and lawyer. Lai of EY describes this as being “an incredibly daunting exercise” for many companies. “They spend months compiling the documents in the data room and answering in-depth questions from the sponsor, accountants and lawyers. Before the due diligence begins, we need to hold in-depth discussions with both the sponsor and the company to understand their business better and ensure the restructuring won’t trigger any accounting problems or non-compliance with the listing rules.” Lai says many accounting issues can arise at this point, such as around the collectability of receivables and the value of intangible assets. He adds that issues can also occur with variable interest entities in Mainland China that may have been conducting restricted business, and they may have used structured entities for this arrangement. “The role of a CPA is very critical, and they have to be involved at the very beginning of an IPO,” he says.

“The role of a CPA is very critical, and they have to be involved at the very beginning of an IPO.”

Lai adds that sometimes non-financial issues can arise during the due diligence process that the reporting accountant has to deal with. He remembers being involved in the IPO of a state-owned enterprise in the Mainland around 10 years ago, which, alongside its core business, included schools and hospitals. Some of these entities were not suitable to be included in the listing and needed to be spun off. Lai was told the employees had a strong attachment to many parts of the group and would protest if they were not included in the listed entity, but in the end they were excluded, as their non-profit making objectives made them unsuitable for a listed company.

The due diligence process includes company site visits, as well as pre-site document reviews and post-site document cross-checking. Yung of CCBI says: “Due diligence is undertaken by sponsors to establish the completeness and accuracy of the information contained in the listing documents. As a result on-site due diligence is always an important step to sponsors.”

But COVID-19-related travel restrictions, which have been in effect since early 2020, have created new challenges, as CPAs cannot always be physically present at the site to conduct this work. “Last year, I worked on the listing for China Bohai Bank. I left the clients’ office before Chinese New Year last year and I didn’t imagine I wouldn’t go back to it again. After Chinese New Year, when China was closed, all the meetings changed from being face-to-face to teleconference. We didn’t meet the client again before the listing in July,” Yung says. “Previously, I couldn’t have imagined doing an IPO without meeting the client but that is how we do many deals nowadays.”

Fong of Yue Xiu says a common challenge in the pre-IPO stage is coordinating the different professional parties involved in the process, as many tasks are interlinked and if one is not completed on time, it can impact the whole process. “The IPO timetable is usually very tight. As a coordinator, we need to push all the parties to meet deadlines.” Huang of KPMG adds that it is particularly important that companies with a complex structure ensure they leave enough time for restructuring.

While the pre-preparation process typically takes many months, it is sometimes carried out on a much tighter timetable. Fong remembers being involved in the IPO of Dah Chong Hong Holdings Limited, a spin off of CITIC Pacific Limited, in 2007. The conglomerate was active in a number of different areas, including motor vehicle sales and services, the sale of food and consumer products, and logistics services. Despite the complexity of the group, the IPO was done at an accelerated pace to take advantage of strong investor sentiment at the time, and took just four months from preparation to completion.

“Under such a tight timeline, we had to do everything correctly the first time. We had to do on-site due diligence inspections, third-party interviews, review huge documents and work with the auditors to ensure all the figures stated in the prospectus were correct.” To meet the deadline, Fong says he worked 18 to 20 hour days, seven days a week, and was constantly communicating with the other parties involved to analyse documents, solve issues and keep everything moving. “I remember staying at the printing company for more than 40 hours non-stop to edit and verify all the listing application documents and the prospectus,” he says. His hard work paid off and the company successfully listed on 17 October 2007, 13 days before the Hang Seng Index reached a new peak of 31,638.

Telling the story 

A crucial part of preparing a company for an IPO is creating its equity story for investors and other stakeholders. Lai of EY explains: “Investors won’t be interested in the story if they find it difficult to understand. The company’s business model and equity story must be supported by historical financial information demonstrating the trends underpinning it and the management’s business plan.”

Yung of CCBI points out that CPAs have a key role to play in this area, as their training enables them to understand the financial performance of a company and demonstrate its financial capabilities and strengths. “It is like preparing a CV for the client. You have to extract the most interesting and attractive points of the company to demonstrate to the investors,” he says. It is important that the prospectus gives investors a clear understanding of the company’s business model to enable them to make an informed investment decision. The financial information in the prospectus is also audited by a CPA to ensure its accuracy. Fong of Yue Xiu points out that getting the prospectus right can help to attract more investors. “We see oversubscriptions for IPO candidates that have a sound business model and attractive business outlook,” he says.

Fong adds that the experience CPAs have from serving numerous clients across different industries enables them to understand the business model of a company quickly and present financial information and a business description in the prospectus with reference to competitors in the same industry. “CPAs are important to present financial and accounting figures in a meaningful manner, so having an accounting background and good industry knowledge is definitely a plus to prepare the prospectus,” he says.

Sound governance structures

Putting good corporate governance structures in place is also an important part of the IPO process. Once a company is listed, it must comply with the relevant regulations, such as the Corporate Governance Code and the Model Code for Securities Transactions by Directors of Listed Issuers in HKEX’s listing rules. Huang of KPMG says: “After listing, good corporate governance is crucial for a company to meet stakeholders’ interests, so when a company goes public, it often needs to address its internal process and organization structure in order to meet the more stringent regulatory requirements and higher expectations from shareholders.”

Given accountants’ central role in preparing corporate reports, Huang adds that the profession has much to offer in terms of building trust in environmental, social and governance (ESG) disclosures. “Audit firms are the professionals of choice in assuring ESG information, as they have the expertise in measurement, controls, assurance and reporting. They can help companies integrate financial and ESG information in reporting, and provide independent assurance for companies’ internal and external reporting systems to strengthen the credibility of the ESG information,” she says. “New metrics and measurements of progress that factor in ESG measures such as natural, social and human capital will be required for the effective management of a companies’ resources consumption and value creation. Accountants will need to develop methodologies to address these factors.”

Lai thinks CPAs can play an instrumental role at all stages of corporate governance from informing decision-making with timely and accurate financial information and assessing investment scenarios, to designing effective internal controls, measuring performance, reporting and providing assurance. “The shareholder-centric governance model needs a CPA as a key change maker and entail a broader perspective on value creation, and fully integrating ESG factors with financial performance. CPAs can further leverage their expertise on how to help companies make the right changes to reduce their environmental footprint and costs. CPAs can help businesses to report on their performance in an integrated way using the International Integrated Reporting Council’s International Integrated Reporting Framework. This will help to measure transformative progress and share experience on issues that are of public interest,” he says. Huang adds: “During the IPO, audit firms can provide an IPO readiness assessment to evaluate the internal controls on corporate governance and the compliance gaps and needs, advice on the board/committee requirements and composition and assist in establishing an audit committee and better corporate governance.

After the IPO, audit firms can provide companies with updates on the latest developments and changes in corporate governance requirements and other applicable regulatory matters. They can also act as corporate governance consultant to perform incremental compliance and transparency enhancements.”

Fong points out that good corporate governance also encourages transparency, and helps to protect shareholders’ rights through setting up various systems to manage risks and promote internal controls, making it an important consideration for investors. Lai agrees: “Based on our experience, corporate governance is one of the most important factors considered by institutional investors.” He adds that as institutional investors drive the share price up, corporate governance is an important consideration. As a result, he suggests companies put good practices in place early, especially in terms of recruiting qualified independent non-executive directors, improving internal controls and forming a qualified audit committee. The Institute’s Best Corporate Governance Awards act as a good reference point for companies, with the winners showcasing what good corporate governance looks like.

Answering questions

Once a company has submitted its documents to HKEX and the SFC, it needs to answer questions from the regulators to prove that it is suitable for listing. Huang of KPMG points out that the main reason HKEX rejected listing applications in recent years is questions concerning suitability, with 17 applicants rejected on these grounds in 2019. “If the exchange has reason to believe that the listing applicant is listing for a purpose other than the development of its underlying business or assets, or there is a likelihood of it becoming a shell company, it will pay greater attention to the applicant’s commercial rationale for the listing, its proposed use of the IPO proceeds and whether there is a genuine need for the funds,” she says.

CPAs can play a key role at this stage in helping to answer questions from the regulator.

The submission stage typically lasts only one to two months, and deadlines are tight for submitting any additional information requested, with the regulators sometimes requiring a response on the same day. In the meantime, companies also need to prepare investor presentations and determine the pricing of their shares, before embarking on roadshows and pricing their share offers once they have received approval from the regulator.

An ongoing role

Fong of Yue Xiu points out that once an IPO is completed, listed companies still need to monitor how the proceeds are used, to ensure they are applied in accordance with what was said in the prospectus. They also need to ensure ongoing compliance with requirements in the Listing Rules, including the timely disclosure of financial information, such as annual and interim results, holding annual and extraordinary general meetings and providing relevant information on acquisitions and disposals. CPAs, Fong adds, are involved in a number of ways post-IPO. For example, a CFO could identify potential connected transactions which may require additional disclosures. “An internal consultant could provide recommendations to companies for improvements in internal control processes, while an auditor could provide the company with updates on accounting standards that may impact its financial reporting,” he says.

Lai of EY points out that many regulatory breaches involve compliance with post-listing transaction rules, especially connected transaction rules. “Once market trading begins, the real work of being a public company starts. With the listing out of the way, it might be tempting to relax, but from our experience if the company wants to excel in the market, it needs to keep moving forward at a consistent pace. Chief executive officers and CFOs must deliver on the promises made by their company at the time of the IPO, so they have to meet and beat financial projections.” He adds that communication to ensure an orderly market in the company’s shares is also key. “CFOs and auditors play an important role in detecting potential surprises relating to financial information at an early stage and promptly escalating them to the board to deliberate on an appropriate action plan to avoid upsetting the market and the regulators,” he says.

Huang adds that there is also a global trend for sustainable development, with listed companies needing to publish an ESG report and incorporate ESG factors into their business strategy, creating another area with which CPAs can help them.

A range of skills

CPAs need a range of hard and soft skills if they want to advise on IPOs. Fong says they must be good at interpreting numbers and have the ability to use the financial figures to tell a story. “They also need to have a strong business sense, knowledge of the overall IPO workflow and the ability to write a prospectus,” he says.

In terms of soft skills, he suggests CPAs working in the area should be sceptical, curious and have good communication and project management skills. “It is important to read IPO market news and newly-issued prospectuses regularly. It is also crucial that they familiarize themselves with the listing rules, guidance letters and practice notes published by HKEX in relation to IPOs,” he adds.

Yung of CCBI agrees that CPAs need good communication skills to not only communicate with the client, but also cooperate with other professional parties. He adds that his firm typically recruits CPAs who have between three and five years’ experience working at one of the Big Four firms, particularly those with an audit background, to work as analysts or associates.

Lai thinks the hard skills CPAs need to work on IPOs go beyond just having the fundamental accounting skills. “They need a sound understanding of capital market dynamics, funding options and listing regulations. An IPO is often a grueling process involving many parties, so CPAs are often under pressure to produce up-to-date financial information. Good communication and interpersonal skills are definitely important soft skills.” He adds that CPAs who want to work in this area also need to have a good level of emotional intelligence and the ability to think out of the box. “I think the best way to acquire these skills is to roll up your sleeves and get your hands in the game. You can also supplement it with the relevant continuing professional development training,” he says.

Bright prospects

Looking ahead, Huang expects Hong Kong’s IPO market to continue to enjoy strong momentum, creating significant opportunities for CPAs who specialize in this area. Lai agrees: “I think CPAs specializing in IPOs have a bright future in Hong Kong. Capital market developments go hand-in-hand with economic growth. Hong Kong is an international financial centre, and the stock market is one of the pillars for Hong Kong’s economy.”

Meanwhile, HKEX is continuing to update its rules with the recent announcement that the profit requirements for Main Board listings will increase by 60 percent from 1 January 2022, rising from HK$20 million to HK$35 million in the most recent financial year, and from HK$30 million to HK$45 million in aggregate for the two preceding financial years, during a three-year track record period, with an aggregate profit requirement of HK$80 million. The increase, which could exclude some potential IPO candidates from listing, creates new challenges for CPAs working in this area.

But Huang points out that while the IPO process may be challenging, there is a huge sense of accomplishment when it is completed. Yung agrees, saying the most rewarding aspect of the process is seeing the client continue to grow after listing, with this improvement reflected in its share price. Lai says: “An IPO is a life-changing journey for a private company. It is particularly rewarding to see the positive transformation of the company and its people in terms of corporate governance and social responsibility. The complexity of running an IPO project and the associated time pressure can lead to a lot of stress, so witnessing all our hard work come to fruition is immensely satisfying.”

A day in the life

Given the tight deadlines they work under, professionals involved in the initial public offering (IPO) process have packed schedules. Archie Fong CPA, General Manager at Yue Xiu Capital Limited, and a member of the Institute’s Corporate Finance Advisory Panel, says his day typically starts at 5:30 a.m. when he checks his work correspondence, such as emails, and WhatsApp and WeChat messages. He then reads the news to stay on top of any financial or economic developments that may impact his clients. He arrives at his office at 9 a.m. and spends most of the day reading execution-related documents, due diligence reports and other reports relating to any ongoing IPO, as well as holding face-to-face and online meetings, both internally and externally, looking at different issues that have arisen and putting forward proposals on how to tackle them. Outside of office hours, he attends business dinners and events, often with clients. “At the end of the day, I hold an internal call to discuss the to-do list for the next day,” Fong says.

Like Fong, Jacky Lai CPA (practising), Partner, Assurance at EY, also starts his day by catching up on the news, paying particular attention to regulatory developments and trends in other markets, such as the United States and Mainland China. Once in the office, he spends much of his time talking to different professional parties, including sponsors and lawyers, to see if there are any new business opportunities, as well as liaising with clients and answering any questions they may have. He adds that he is sometimes involved in giving feedback to Hong Kong Stock Exchange (HKEX) about the type of companies that want to list in Hong Kong and the challenges they encounter.

Ivanka Huang CPA, Senior Manager, Capital Markets Group at KPMG China, describes a typical day as having to deal with ad hoc and urgent issues that arise during the IPO process. “There are many calls and meetings with different parties participating in the project, as we work together to deal with issues and respond to any comments from the regulators. There are certain key milestones, such as the Form A1 Listing Application Form submission, and the prospectus finalization.”

Kin Yung CPA, Associate Director at CCB International Capital Limited, and a member of the Institute’s Corporate Finance Advisory Panel, points out that a signing principal may cover four to six deals at the same time. As a result, his day is divided between projects at different stages of the IPO process. For deals at an early stage, he spends his time reviewing the work plan, timetable and the scope of work being carried out by different parties. For projects at the middle stage, his time is taken up with reviewing the drafting of the prospectus, holding internal control discussions and looking at the draft reports issued by other parties. Once deals have reached the review stage, he is on standby to answer any queries raised by the regulator. “If we receive an enquiry from HKEX, we will arrange for all parties to have a discussion call immediately and review the proposed response,” he says. In addition, he also has to find time for pitching calls and meetings with potential IPO clients.

Advice for companies seeking to list

Maintaining good communication is key for companies working with accountants and other professionals during the initial public offering (IPO) process. Kin Yung CPA, Associate Director at CCB International Capital Limited, and a member of the Institute’s Corporate Finance Advisory Panel, says: “Communication is very important as the client needs to prepare a lot of the underlying documents for the professional parties. If they fully understand the other party’s request, it can save a lot of time.”

Ivanka Huang CPA, Senior Manager, Capital Markets Group at KPMG China agrees, pointing out that the timetable for an IPO is usually very tight. “Regular and prompt communication among professional parties and with management is key to making sure the timetable stays on track,” she says.

Archie Fong CPA, General Manager at Yue Xiu Capital Limited, and a member of the Institute’s Corporate Finance Advisory Panel, points out that it is also important that management builds up a good relationship with the other professional parties involved in the IPO. “Every single document needs to be scrutinized by the professional parties in detail. Therefore, it is important for the management of an IPO candidate to build up mutual trust with the professional parties and provide all the documents, contracts and accounts at an early stage of the pre-IPO process,” he says.

Jacky Lai CPA (practising), Partner, Assurance at EY, suggests companies should focus on allocating a data room, so that they can quickly provide the documents needed by the other professional parties to verify their company’s history, business strategy and financial performance for the due diligence process. “The success of the IPO depends to a large extent on the seamless cooperation among the company and professional parties. It is therefore important that at the commencement of the IPO process, companies are already staffed with suitably qualified and experienced personnel who can work hand-in-hand with the professional parties.”

He adds that the company’s directors must understand that they take ultimate responsibility for the contents of the listing document, and there must not be any material omissions that render them misleading. “Details of any non-compliance incidents must be communicated at an early stage. No professional advisors like surprises that can cause problems to the IPO project,” he says. Lai also suggests that company executives learn how to handle the media and conduct investor relations sessions during the IPO process, including becoming familiar with the information they can provide to these groups without breaching the listing regulations.

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